Fears of a shortage within five years propelled long-term oil futures prices to almost $140 a barrel on Tuesday, further stoking inflationary pressures in the global economy.

Investors rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day. The spot price hit a record $129.60 a barrel.

Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints.

Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.”

It's about time "peak oil" made it to the frontpage of our business papers. Yesterday, the FT still had a positive spin on things, in an article saying that the US decline in foreign oil dependency is already becoming more visible, with imports making up 57.9 per cent in the first three months of this year, down from 58.2 last year. In other words, market forces are doing their job, nothing to worry about, move on.

Today's tone is quite different - maybe it's the $9 per barrel jump in one day, and the fact that it's long dated prices that are icnreasing more than short-dated ones, ie worries are now about future supplies, not current supplies, a change whose significance is hard to understate.

For politicians, the only heat they are getting is from fishermen and truckers who are being squeezed by higher costs (you'd expect that with such an across the board price increase, competition would not be impaired, and higer costs would be passed on to consumers, but the market power of big retailers still seems to limit that to some extent for now, so the problem remains localised within the fuel-intensive sectors rather than with the end-user consumers in the form of inflation.

Not to worry, prices will increase until prices are actually passed on and cause new consumption patterns; the fact is that the current "boiling frog" price increases are unlikely, it would seem, to lead to shortages or rationing in the short term, because that's not where the problem is.

Of course, the good news of sorts is that, if the problem is access to oil or energy a few years out, then we have time to actually do something about it. Not much, but some. Awareness is key to that, but it has to go through a thick fog of denial.

shows a simple thing: oil was incredibly cheap, and we simply used as much as we needed without regard for the price.

Right now, it's no longer ultra-cheap (at least the price begins to be noticeable), but it's still not expensive enough for us to really look for ways to do without (ie it's not painful enough, for large numbers of consumers).

So if demand is to actually shrink in any significant way, pain will need to spread a lot wider and deeper.

I can't help but think of a story from WW2. The US military required a vehcile to make amphibous landings. The total time from the inital request, through design and into full production was 30 days.
What is happening is a crisis. Already change is underway. Its slow but you be surprised how quickly change can take once necessity is identified.

As a rather famous Frenchman (guess which one) once said..."People only accept change when they are faced with necessity, and only recognise necessity when a crisis is upon them".

The solution is not going to be some big thunderbolt from the sky, but a host of smaller actions.

The difference there is that the US was already on a war footing, and the industrial base was being pushed to operate at maximum speed. A more realistic view would be to look at how long it took to get the US working on war in the first place - which was a few years, starting with plenty of existing industrial capacity.

The difference now is there's limited industrial capacity, and limited political understanding of the problem. No one could debate the fact that the war in Europe was happening. But you can interpret peak oil and climate change endlessly without having to do anything about them.

If it were framed as a war effort - or something like it - you'd start to see some changes. But that's unlikely to happen with any of the current crop of pols. And the population aren't used to being told they have to make sacrifices, so they're unlikely to vote for anyone who says otherwise.

I am making an analogy (I thought that was obvious!), one which is that once things get going, the pace of change can be rather shocking.

Peak oil is tied in, at least from an energy perspective, is tied in with climate change. At least in Europe, climate change has been a major political issue for at least a decade. The result of that has been an upswing in R&D across a range of technologies such as printable solar panels, bigger wind turbines, fuel efficency and fuel cells. The scope and range of technolgies that exist and going to exist is truly mind blowing.

These technolgies are coming increasingly on stream and going into production. These are also areas in which Europe dominates. Inudustrial capicaity is limited, but it is not static, it can be increased when demand increaes. It also helps that the EU has the largest industrial base on the planet.

The challegne tends not to be technological, but political and social. People STILL deny that climate change is an issue, that high oil prices are JUST because of taxes, and so forth. Its up to politicans to address the issues, and for an infomed populos to make sure they stay focused.

Thank-fully(!) climate change is the 900lb gorrila sitting in the corner of the room messing the place up. It did not go away, and has now brought its mates along to smash up the party. Europe is better placed than the USA with regard to peak energy because we have taken climate more seriously and have been making investments, both in terms of technology and socially and poltically.

We are not yet on a 'war' footing, and it does take time, but as my original analogy was making, once things get going, progress can be very rapid.

It will be difficult on the transport front.. but not as much in the energy front.. amaor projects in electricity would probably be needed .b. utt hey are roughly on time adn with a delay of 5 years at the most.

Regarding major shift in private transport... I am quite with you here...soutions are way way behind.. adn the investment needed willl take a decade at fast speed....so driving less and flying less is the only option I foresee now. Luckily, this would be enough since we are overusing roughly 15 million barrels per day on unnecessary driving.

Another question is how people would feel about having to drive less and about the oil-realted inflation in agricultural and imported products.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact.
Levi-Strauss, Claude

It will be difficult on the transport front.. but not as much in the energy front.. amaor projects in electricity would probably be needed .b. utt hey are roughly on time adn with a delay of 5 years at the most.

Not in the UK, unfortunately. We have plenty of greenwashed PR spin, but not so much of the useful power-generating windmill spin.

The point isn't so much about where we are now, it's that there are no plans - none at all - for dealing with peak oil.

There will be contingencies for rioting and civil unrest, and probably some mouldy minimal food stocks somewhere. But Whitehall and Westminster have no clue how to deal with oil or gas shortages.

The last time this happened inflation exploded, and we were all on a three day week with rolling power cuts trying to survive by candlelight. I don't see any evidence of better organisation this time around.

It's going to take mega-schemes like the Saharan Sun project to make a difference, and that's not looking likely until around 2020 at the earliest.

I agree completley. the UK is in s more difficult place than Spain regarding energy projects.

The problem in SPain is the same as in other parts of the world regading no "forwad thinking" regarding peak-transport but I wanted to point out that not everyone is as fuc*** as UK and other coutnires in similar situations) which may have problem in the electric grid without shrot-term solutions :)

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact.
Levi-Strauss, Claude

We are in a pretty pathetic position it's true, but I take a smidgeon (only a smidgeon mind) of comfort in the fact that we've been indulging in massively drawn out planning procedures for things like the London Array (an extra 45% on the construction cost due to planning delays thankyouverymuch). The UK currently has ~9GW of windpower projects stuck in planning hell and the very real prospect of a similar certifications quagmire for the proposed nuclear fleet.

If it gets to the stage of 3-day weeks and rolling power cuts, then I would expect such bureaucratic/administrative luxuries will be ditched quicker than a very quick thing. Of course if our governing classes had been a bit more clueful then we'd have avoided all the costs and inefficiencies of doing a crash build at the same time as world+dog - but you can't have everything.

not too far away, certainly within ten years without new capacity. I went to an excellent lecture about 18 months ago by the energy advisor to the scottish parliament and he laid it out simply, that the UK needs vast investment in energy plants to replace the many nuclear and coal plants being decommissioned over the coming decade.

But that is 10 years of gradual demand increase and stepwise but not catastrophic supply decrease (by power plant attrition). It's not a shock on the scale or speed or the 1973 oil embargo or the mining/power strikes in the UK in the 1970's.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

no it's definitely a boiling frog thing and governments are aware of it. No wonder there's the push for nuclear and new coal plants, they know they'll need a buffer in the interim.

I start my PHD in nanophysics this July, working on nanocrystalline diamond, which could be a really efficient converter of solar heat to electricity. My project will be trying to adapt the material to use in Condensed Thermal Solar plants, with any luck we'll be producing it within five years at much greater efficiencies than the steam ones used now. If we don't get there, someone will. The technologies are coming and it's beginning to get serious funding so hopefully any new plants in the short term will just be stopgaps.

at the time of the three day week a particularly intrepid reporter went to the editor of the Daily Mirror and suggested that they hire a light aircraft, and fly over the power stations to take stereoscopic photos of the coal stockpiles and from calculating their size, see whether a three day week was truly necessary. he was told it wasn't necessary as the leader of the miners union had personally assured the editor that there was plenty of coal at the power stations. So he rang the editor of the Daily Telegraph suggesting the same scheme, only to be told it wasn't necessary as the editor had been personally rung by the prime minister and assured that there was definitely a severe coal shortage at the power stations.

Any idiot can face a crisis - it's day to day living that wears you out.

The last time this happened inflation exploded, and we were all on a three day week with rolling power cuts trying to survive by candlelight. I don't see any evidence of better organisation this time around.

I don't see how that analogy holds at all. What unions are going to close down the power generation system in a sudden shock this time around?

Rationing, power cuts, and a limited working week are the next stage, and will guarantee a wave of foreclosures and other financial mayhem.

This bit may be part of the solution rather than the problem. It may well be necessary to move society to a lower production/consumption level. Limiting the workweek and rationing fuel as forced by petroleum shortage may well be the ticket. Assuming it would be done alongside strategic investment in alternate power infrastructure and a general move towards sustainability to allow for comfortable existence at a lower consumption level I see nothing bad here. A drawdown of the workweek and cuts in consumption are after all just repacking productivity gains in time rather than material affluence.

The demand reduction will be starting now. People will be driving less, flying less, buying less, and heating their homes less.

It's already started. Down here, at least, petrol usage has been flat for the last two years, and some preliminary statistics earlier in the month suggested that counter to all the economists predictions, it had in fact dropped. That's what three years of high prices and a recognition it is only goign to get worse will do to you.

Unfortunately, our government has used it as an excuse not to include transport in its emissions trading scheme. Stupid, stupid, stupid.

Only supersized alternative energy projects, like the Severn Barrage, are going to be able to make a dent in what's needed.

I disagree completely. Many such mega-projects, and the Severn Barrage especially,

are big only relative to a single distributed power project, but not relative to potential annual installations, not to speak of total demand;

take a long time to be built.

It's not the size of the single project that must be big, but total annual installations (all projects, be them one mega or a million mini). And it doesn't really matter whether, say, a massively increased solar cell production finds its purchasers in a Sahara mega-project or millions of homeowners. (In fact, thinking of the former's extra costs in setting up construction far-away, power transfer infrastructure, and maintenance; it may not even be cheaper on more sunshine and economies of scale.)

The demand reduction will be starting now. People will be driving less, flying less, buying less, and heating their homes less.

It still won't help, because the genius of the markets has failed to offer any reasonable short or medium term alternative.

I don't think that follows. Jerome's diary is documenting medium-term market expectations of high oil prices in the medium term, and now even the IEA is revising its supply forecasts. Which means that in the short term we should start seeing changes in medium-term planning both at the government and corporate levels.

Rationing, power cuts, and a limited working week are the next stage, and will guarantee a wave of foreclosures and other financial mayhem.

You're assuming political unwillingness to address a crisis when it manifests itself, which is not a given.

we don't have years.

I think we do. There was a story recently about Juneau, Alaska, reducing its power consumption by 30% in a matter of weeks by lifestyle changes induced by a disruption of its electricity supply. We in fact have a few years to reduce our demand by 30% while building renewable energy projects.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

Not to worry, prices will increase until prices are actually passed on and cause new consumption patterns; the fact is that the current "boiling frog" price increases are unlikely, it would seem, to lead to shortages or rationing in the short term, because that's not where the problem is.

Sales of large SUVs plummeted 28% in the first quarter this year, while subcompact sales rose 32%, according to Autodata Corp.

[snip]

Small cars are now the largest segment of the U.S. auto market, accounting for 18% of new car sales. Last year, U.S. consumers bought a record 2.8 million of them, and with sales up 4% in the first quarter this year, the record almost surely will be shattered.

U.S. drivers are doing something they haven't done for nearly two decades -- consume less gasoline.

Gas consumption so far this year is down about 0.2 percent compared to last year, according to the Energy Information Administration. The federal agency is predicting that gasoline demand will be down 0.4 percent this summer and 0.3 percent for the year.

That may not sound like much, but it would be the first time since 1991 that there's been a decline in annual gas consumption. And it would be only the eighth year since 1951 in which demand for gasoline has declined.

The boiling frog is jumping all right.

Higher fuel costs are being worked into the economy like they were in the 70s and the 80s. Individual-level, consumers are already taking the options which are available to them. At the infrastructure level, there are no huge technology obstacle to substitution by GTL, CTL, BTL, augmented xTL by renewable or nuclear electricity. Same with EVs, etc. If the consensus among the economic "elites" is that oil prices will stay very high, alternatives will show up, late and way above cost like everything else, but it will show up if there is money to be made. I trust the markets to get there nilly willy, two steps forward, one step backwards.

The real issue is whether the governments of consumer countries will just bob around with the flow of the market for solutions - at the cost of lost opportunities, huge wealth transfers to producing countries and the occasional riot - or if they will tackle the issue proactively through taxation and direct public investment.

It's a very bad idea because, if a country can tie its shoelaces on its own, it has much better things to do at home to solve the issue than going around blowing up things and killing people. And if it can't tie its shoelaces like a grown up, well, going to war is a bad move anyway.

The US has blown about $540 billions in direct expenditure on the Iraq war so far.

Now, take the Oryx GTL plant in Qatar: 1 billion for 11 millions barrels/yr. It's still in start-up phase with teething problems but just 4 years after ground-breaking, it's perfectly normal. That's about $90 per bbl/yr capacity.

Two things:

It uses natural gas so syngas production and clean-up is somewhat easier than with coal. Double the gasification budget - 35 % of the plant CAPEX - to be safe with coal so assume $121.5 per bbl/yr capacity (= 90*1.35).

It's a first of a kind design. Cookie-cutter industrial plants are typically 20% cheaper than the first 2 or 3 protos/demos in a series once the downstream manufacturing capacity is up and running. So $97.2 per bbl/yr capacity (121.5*0.8).

So, all in all, let's take a CAPEX of $100 per bbl/yr. I don't claim that to be precise. Inflation also comes into play. Etc. It's just meant as an order of magnitude.

A CTL plant is about 60% efficient in energy conversion and self-sufficient for its utilities. Assuming 25 MJ/kg for a mix of sub-bituminous coal and lignite and 35 MJ for a mix of LPG, gasoline and diesel, 1 m3 of liquid fuel takes 2.3 tonnes of coal ( 35/0.6/25) or, for the non-metric folks, 0.4115 short tons per barrel of liquid fuel.

I don't count the cost of the coal extraction equipments - not very expansive or it wouldn't be so popular for electricity - nor take into account the fact that pure CTL is butt-ugly for CO2, but hey, global warming or war, the choice is easy, and a CTL plant actually produce its CO2 as a fairly pure, separated stream, ready to pump if CO2 sequestration ever becomes reality.

~~~~~~~~~~

So, if, instead of going to war with Iraq and pissing away $540 billions in the wind, the US had built CTL plants with those $540 !@#$&^* billions, it would have on-line or in the pipeline a production capacity of LPG, gasoline and diesel in the order of 5.4 billion barrels a year for an annual consumption of 7.6 billion barrels of crude (which means less in products after refining).

It would use ~2.2 billions short tons of coal for that, a 180% increase of its current production (~1.2 billions short tons), which is a lot but not a jump in order of magnitudes, so we're still within the bounds of physical reality.

With that CTL capacity and local oil production, the US would not be importing a single drop of crude. Oil would be $15 a barrel. That would hurt the producing countries far more than any war.

~~~~~~~~~~

So, tell me, if something as inelegant and crude as CTL works, why would anyone (Republicans set aside) go to war?

I read somewhere about an idea to have the CO2 exhause go trhrough a pond full of blue-green algae to produce second-generation biofuels... Of course, when you burn the biofuels you still release that CO2, but in terms of CO2 emitted per energy produced it improves the balance.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

Oh, if we are reasonable we will do engineering instead of warmongering. But since when were we reasonable? Peopple will blame the ayyyyyrabs and the politicans will be happy to execute the will of the people - the bastards.

However, what's really required is not a reduction of SUVs and pickups to 45% of all new cars and a practically flat consumption, but a reduction to practically nil in the former and reductions in double digits on the latter. So, we are still a lang way from real demand destruction.

I think we'll see a bit of demand destruction in western countries, just by SUVs staying home or going to the scrapyard. See that article from last month. SUV are not selling new, with even more pressure on second hands and trade-ins. Pretty interesting read.

There is always a lag between price signals and infrastructure changes. With cars, it takes about 20 years to renew the fleet although strong pressures like gas prices can accelerate that.

What's interesting in the US is that both the median age of the fleet and the scrappage rate are going up. What it suggests is that recent vehicles are going to the scrapyard - cars sold during the gas guzzling madness of the past 10 years - but older vehicles, which tended to be pretty sober, are staying in the fleet. It would actually match a bit what I see around me, with friends churning through new fancy cars but also hanging dearly on their old Honda Civic 1989 for commute. So, I wouldn't be surprised if we see a reduction of a couple of percents a year in the US. Just because of market inelasticity, it could end up moving oil prices quite a bit.

But at short term, I agree. Demand destruction will mostly happen on the margins, in weaker economies where energy is a much bigger share of income, hence much more sensitive. It's already happening in countries that cannot sustain subsidies against current prices - Nepal, Africa, etc.

What it suggests is that recent vehicles are going to the scrapyard - cars sold during the gas guzzling madness of the past 10 years - but older vehicles, which tended to be pretty sober, are staying in the fleet.

All it takes is critical mass, enough of us doing it that social mores, especially as regards workplace accomodations, change.

Over here in the frozen inbred tundra of Minnesota, in winter I used to see one, maybe two other tracks on the trail after a light snow. Now there are a dozen. And now, there are easily 10 bike commuters on the road where there were 2.

And in other cities, critical mass is starting to be acheived...on the road at least. The quantity of bike commuters in Paris was impressive, due I'm sure to a combination of 1.00/litre petrol and serious meausres taken to facilitate bike commuting.

Almost makes this particular observer look forward to 1.50/litre petrol.

A friend of mine in the early 60's who was the manager of Norke Fina, an oil company on Norway, once told me "Oil companies always lie to avoid taxes". Did you hear any of them speaking of the West African offshore field ten years ago ? Does anyone know how much oil lies underground in Iran, Iraq or Siberia ? As Total's CEO said on the BBC today "The problem is one of access to the oil fields". The oil rich countries are fed up with the way the oil companies have dealt with them for three quarters of a century so they have to change their modus operandi and present themselves as service companies, as Schlumberger has been doing from its very beginning. Suddenly you'll see oil starting flowing again from everywhere. As another acquaintance of mine once said "Oil is found at the convergence point of a salt dome and a millionaire" (with today's inflation, that should be changed to "billionaire'). Of course, we'll come to peak oil but not just now

We've been talking a lot in recent weeks about the problems caused by biofuel production in terms of high commodity food prices. But what would the effect of eliminating biofuel be on the oil prices given the tight market? I have some sort of vague recollection of reading somewhere that 2008 would see 2mbe/d of total biofuels - is that correct? And how much oil is used in biofuel production over and above the amount needed to produce the food? I.e. what is the net contribution of the biofuel industry to 'oil' production.

The yield in energy produced for energy consumed by the production is very good for sugar cane in Brasil. The concern there is about the ecological effects of creating vast new mono-culture plantations. Ethanol from corn is a different story and the yield is only slightly positive and the whole industry is often characterized as largely a boondoggle for corn farmers and agrabusiness.

Research is being undertaken, mostly at the university level, to produce ethanol or biodiesel from cellulosic feed stocks such as switchgrass, which is very fast growing and will grow well on land not suitable for crop agriculture. Such land is abundant in Arkansas, eastern Oklahoma and other areas, The primary requirement being 30" or more of rain per year.

The holy grail of this research may well be identification or creation of biological processes for rapidly digesting cellulose. Termites have microbes in their gut that perform this function. Good news/bad news: this approach may produce affordable fuels/it may involve genetically altered organisms or synthetic organisims. It may also be a process that can be retrofitted to at least biodiesel refineries and it may be available relatively soon--3-5 years.

Sorry for the lack of references. I am starting to keep track of significant items that can be used in ET comments and posts, but am not there yet.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

The world's premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.

The Paris-based International Energy Agency is in the middle of a large study of the condition of world's top oil fields. Its findings won't be released until November, but the bottom line is already clear: Future crude-oil supplies could be far tighter than previously thought.

The IEA has predicted for several years that crude-oil supplies will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day now. But the agency is now worried that aging oil fields and diminished investment mean that companies could struggle to break beyond 100 million barrels a day over the next two decades.

The agency's forecasts are widely tracked throughout the oil patch, so a blast of cold air from the IEA could further rattle an oil market that has already seen crude prices rocket over $130 a barrel, double what they were a year ago.

Long term futures, like all other futures are bets and have no relationship to the physical market price other than peoples' expectations of it.

I am deeply concerned at what I believe to be a price bubble. It looks to me as though the physical market - ie the crude oil in the supply chain - has been inflated in some way (using forward physical contracts, actual purchases and storage in tank and on vessels) probably by a few of the major players acting in concert.

When this goes ahead on 1st July, not only will ICEFutures then cream off more profit a la Deutsche Borse but energy risk will no longer be "pooled" with other London commodity and financial futures risks as it is now.

The whole thing is an accident waiting to happen - I am irresistibly reminded of the Tin Crisis of 1985 - and IMHO if anyone cared to look they would find the relationship between Goldman Sachs and BP at the bottom of this bubble.

I am not saying that prices could or should return to previous levels, but I do believe that there is a speculative bubble sitting within the ICEFutures "Dark Star" and its membership.

"The future is already here -- it's just not very evenly distributed"
William Gibson